Time Warner’s Door Still Ajar After Nixing Fox

Jeff Bewkes’s plan to keep Time Warner Inc. independent will probably only last so long.

The $73 billion owner of HBO, CNN and the Warner Bros. movie studio rejected a takeover bid from Rupert Murdoch’s 21st Century Fox Inc. last month, saying that its stand-alone strategy is superior to any offers Fox could make. If Chief Executive Officer Bewkes has his way, a deal won’t happen anytime soon. He isn’t interested in selling Time Warner while potential suitors including AT&T Inc. and Comcast Corp. are busy with other deals, a person with knowledge of the matter said last month.

Even if Bewkes fends off Murdoch with a firm “no,” analysts from firms including Needham & Co. and Royal Bank of Canada say the company is now a target. It’s possible that Verizon Communications Inc. or an Internet company could step in with offers, according to Needham. Pursuing a merger with CBS Corp. could serve as another way to defend itself from Fox, Wedbush Inc. said.

“It’s fair to say Time Warner’s preferred path would be to have two to three years to execute their plan, and try to get the share price to a higher value,” Laura Martin, a media analyst at Needham, said in a phone interview. Even if Murdoch is unable to secure a deal, it’s likely Time Warner will get sold to someone else within the next two to three years, she said.

“It’s my view that Time Warner is in play and will not emerge independent,” Martin said. “They’ve made themselves edible by getting smaller.”

Bewkes has narrowed Time Warner’s focus to content over the years: It split off Time Warner Cable Inc., AOL Inc. and Time Inc., making it a ripe target as content owners such as Fox weigh mergers in response to the consolidation that’s taking place among cable-TV providers.

Representatives for Time Warner, Fox, CBS, AT&T, Comcast and Verizon declined to comment.

Just saying “no” to unwanted approaches has worked for other companies that either remained independent or were able to strike better deals. Walt Disney Co.’s board unanimously rejected an offer from Comcast in 2004 and quickly moved on, handing shareholders a more than 200 percent gain. Airgas Inc. shares are up 68 percent after fending off Air Products & Chemicals Inc. 3 1/2 years ago in what was one of the longest- running hostile takeover attempts.

CF Industries Holdings Inc.’s stock price has more than doubled since 2010, when it snubbed bids from Agrium Inc. and opted to make an acquisition of its own. Earlier this year, Time Warner Cable held out for a better offer than what Charter Communications Inc. had on the table, which resulted in a sale to Comcast for about $7 billion more.

Fox offered $32.42 in cash and 1.531 non-voting common shares for each Time Warner share, valuing the company at about $90 billion including net debt and options, according to data compiled by Bloomberg. Time Warner’s board said the proposal isn’t in the best interests of shareholders and that it won’t pursue any talks with Fox.

“Their best defense is to just say no and tell their story to Wall Street,” Doug Creutz, a San Francisco-based analyst at Cowen, said in a phone interview. He said a deal with Fox is unlikely because “Time Warner is being serious when they say they’re not interested in talking. I don’t think they’re just being coy.”

Bewkes would be more willing to sell Time Warner when Comcast, AT&T and Verizon have digested their large transactions and can actively bid on the company, according to the person with knowledge of the matter, who asked not to be identified discussing private information. Their presence as potential buyers would lead to a truer auction and set a higher price on the company, the person said. Another reason to wait is to see how regulators will evaluate the pay-TV deals currently under review, and to see if there’s willingness to allow for large- scale mergers.

Comcast is awaiting approval to buy Time Warner Cable, while AT&T needs clearance for its takeover of DirecTV. Verizon is still digesting its $130 billion acquisition of the 45 percent of Verizon Wireless that was owned by Vodafone Group Plc, a deal that closed in February.

Comcast and AT&T are highly unlikely to risk their current transactions in order to pursue Time Warner, so any competing bids would need to come from Verizon or an Internet company that could offer a larger cash component, Martin of Needham said. She estimates Time Warner should be valued at $90 to $100 a share in a sale.

Fox’s offer was worth about $81 a share yesterday and only about 40 percent would be in cash. Time Warner shares closed 2.5 percent above that price yesterday, signaling traders are betting on a higher offer from Fox or someone else.

Today, Time Warner shares gained 0.2 percent to $83.22 at 10:21 a.m. New York time.

While a merger between CBS and Time Warner would be attractive, it’s unlikely as long as 91-year-old Sumner Redstone is in control of CBS, according to Martin and James Dix, an analyst at Wedbush. Redstone, who also controls Viacom Inc. and is chairman of both companies, said in 2010 that he “will never, N-E-V-E-R, sell” either one of them.

A tie-up of CBS and Time Warner “could create tremendous scale in TV production, numerous synergies between CBS’s broadcast network and Time Warner’s domestic and international entertainment and news networks,” Dix wrote in a July 28 report. “Such a deal could serve as an effective takeover defense for Time Warner against Fox, given, among other things, FCC rules against the ownership of two Big 4 U.S. broadcast networks.”

The Federal Communications Commission forbids a single company from owning two of the four major broadcasters, meaning that if Time Warner and CBS merged, it would create a hurdle for Murdoch because he owns Fox.

Time Warner shouldn’t go find another deal just to ward off Murdoch because that could end up destroying shareholder value, Creutz of Cowen said. At the same time, Murdoch has to worry about Fox’s stock price, which tumbled for five straight days through yesterday.

Murdoch is considering using proceeds from the sale of Fox’s Italian and German pay-TV assets to boost his offer, according to two people familiar with the matter.

“If his shareholders are worried that he’s going to make a much higher bid, which is going to be dilutive to them, then they’re going to sell their stock and his currency won’t be worth as much,” Creutz said. “That makes it very hard to get a deal done.”

While Time Warner isn’t interested in selling to Fox, the bid has demonstrated that Time Warner was probably undervalued before and created a floor value, said David Bank, a New York- based analyst at Royal Bank of Canada.

Before Murdoch’s proposal was made public, analysts’ average share-price estimate for Time Warnerwas just $74 a share, data compiled by Bloomberg show. It’s since risen to about $84. Bank saysTime Warner’s breakup value is about $93 a share, 15 percent more than Fox’s bid.

“With the initial offer, Time Warner would be better off not taking the deal,” Bank said in a phone interview. However, “everything has a price. I think that Time Warner is in play.”

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